As a business owner or executive, it’s your job to maximize profits and minimize expenses while juggling all of the moving pieces that make your operation run smoothly.
Your energy bill is one of the biggest factors impacting your bottom line; however, most business owners consider their energy bill a non-negotiable expense they’re forced to swallow.
Not true.
There are steps you can take to get the best deal on your energy contract and give your business more room for profit.
- Understand the Energy Market
- Keep Tabs on Regulation
- Know What to Lock In, Or Don’t
- Scrutinize Your Contract
- Don’t Be Afraid to Ask for Help
1. Understand the Energy Market
Energy prices are constantly in flux due to a tug of war between supply and demand factors.
For example, factors such as extreme temperatures – like the heat wave we survived this summer that set record-breaking usage peaks or the brutal cold snap in January 2018 – and a 25% reduction in ERCOT’s coal generation put stress on the supply-demand chain. Households and businesses require more energy to cope with the wide temperature swings, yet there’s less power being generated due to the retirement of less efficient coal plants, such as Monticello, Pearsall, and SR Bertron. [2]
On the other hand, there’s never been a better time for natural gas and renewable energy sources, which supports the state’s supply when demand skyrockets. In fact, 38.8% of the total Texas electricity generated in 2017 was derived from natural gas. [2] While renewable sources of energy – such as wind – contribute significantly less energy to the mix, that contribution percentage has been steadily growing since 2010. [4]
Both demand and supply are variable as the United States attempts to figure out the energy puzzle, which translates into volatile energy prices for customers.
2. Keep Tabs On Regulation
The Electric Reliability Council of Texas (ERCOT) is the electric grid that serves 90 percent of Texas businesses and households.
Earlier this year, Texas electric prices doubled in the first quarter in response to the high demand and diminished coal-based energy supply. With Texas energy customers breaking records in energy usage throughout the year, ERCOT is uncertain about their ability to keep up and, as a result, prices have shot up.
Thankfully, ERCOT has announced that their Fall 2018 projections show that the energy supply will be able to meet demand, and things are looking up for winter. [5] However, a large part of this optimism is due to improvements in infrastructure, which have been quite costly. [6] Those costs are passed on to energy consumers in the form of more expensive utilities.
For example, according to the U.S. Energy Information Association (EIA), Oncor, Texas’s largest energy utility and part of ERCOT, “is planning to spend $1.2 billion to upgrade aging infrastructure and build new lines to accommodate large increases in electricity use associated with oil and natural gas extraction in the Permian Basin.” [6]
3. Know What to Lock In – Or Don’t
Fixed-price energy rates are attractive because they help business owners create budget stability. However, don’t be fooled by the word “fixed.”
A fixed energy-only product is not the same thing as a fixed full-requirements product. To complicate matters, the terminology is not necessarily consistent from one supplier to the next. Educating yourself about the various components and jargon used to describe these products is key to saving on your energy bill and avoiding pricey surprises.
While you may be offered a “fixed rate,” it may not include unknown or unrealized cost components required for service. For example, a fixed energy-only product may hold your commodity portion steady, but does not lock-in all cost components which may be highly volatile.
Selecting a contract based on “sticker price” alone could result in detrimental effects to your anticipated budget. Non-energy cost components such as transmission and ancillary services include the fees associated with operating and maintaining an electric grid. These fees are often defined broadly, which means they can include everything from infrastructure changes to changes in usage calculations to tariffs and rate class adjustments.
Taking into account your business’s propensity for risk and how these components relate are key to shopping like an expert.
4. Scrutinize Your Energy Contract
Another important term to know is “MAC,” or material adverse change. While some form of this language, also referred to as a “regulatory change” clause, is in every energy contract, the way it is used may mean that your energy price could be changed from a fixed-price structure to one that includes deferred pass-through costs until they are realized on your bill.
Again, a huge mistake business owners make with regard to their energy contract is going straight to the listed price, assuming everything is included, and making a decision based on that figure.
Doing so is the equivalent of looking at the list price of a car and buying the cheapest option without seeing the actual product you’ll be driving off the lot.
Instead, use your newfound knowledge of the energy market, infrastructure changes, and terminology to take a closer look at the language that could be used to change “fixed” price products to pass through costs to your bottom line.
5. Don’t Be Afraid To Ask for Help
It can be intimidating and time-consuming to shop for an energy contract smartly. While some business owners have a natural knack for negotiating complex contracts and deals with energy suppliers, others would much rather dedicating their time to running a business they love.
With enough time and research, you can become an expert at most anything. However, outsourcing energy management may be a better use of your valuable time. In addition to scoring the best price, you can be sure you’re getting a great deal on what you truly need without any bank-breaking extras. Asking for help from an energy advisor will mitigate risk and save the most precious commodity – your time.
Energy contracts may look intimidating, but you’re absolutely capable of understanding this critical aspect of your business.
By following these steps, you can up-level your business skills and protect yourself against tricky contract terms:
- Understand the Energy Market – Learn about which factors are driving supply and demand, and whether or not your grid is equipped to keep up.
- Keep Tabs on Regulation – Changes to infrastructure, tax laws affecting energy companies, tariffs, and energy laws can translate into significant pass-through costs to you as the consumer.
- Know What to Lock It In, Or Not – While “fixed price” may sound appealing, understand the context of the offer by reading the contract carefully for key terminology.
- Scrutinize Your Contract – Read your contract in full to understand exactly what you’re getting and not getting in your deal.
- Don’t Be Afraid to Ask for Help – If you still have questions, consult an energy advisor for help. Rather than fearing the process and rushing through it to get it off your to-do list, it may be more efficient to outsource this critical purchasing decision. time to enlist the help of a trusted energy advisor.
If you ever have any questions about your energy contract, don’t be afraid to ask. Post a question in the comments below or contact me.
Resources
- Electric Reliability Council of Texas: www.ercot.com
- http://www.ercot.com/content/wcm/lists/144926/ERCOT_2017_State_of_the_Grid_Report.pdf
- “As 2018 Energy Prices Increase, Should You Lock In Rates?” from The Data Center Journal: www.datacenterjournal.com/2018-energy-prices-increase-lock-rates/
- “Energy Trends To Watch In 2018” from Electricity Plans: https://electricityplans.com/energy-trends-to-watch-in-2018/
- “ERCOT Expects to Meet Fall Demand, Optimistic About Winter” by ENGIE Resources: https://www.engieresources.com/ercot-expects-to-meet-fall-demand,-optimistic-about-winter
- “Utilities continue to increase spending on transmission infrastructure” by U.S. Energy Information Administration: https://www.eia.gov/todayinenergy/detail.php?id=34892
- “Three Components of an Effective Energy Management Strategy for Health Care Facilities” by Constellation: https://blogs.constellation.com/energy-management/three-components-of-an-effective-energy-management-strategy-for-health-care-facilities/
